Momentum

Life in general is a lot about “momentum” and cycles. This is also true for business, finance and economics, let me explain. When describing a person’s life, a company or an entire system, they are growing or shrinking, rising or falling. Let’s look at this from a financial standpoint, the economy is growing or it is not. If it is growing, is it doing so at an increasing rate or a decreasing rate? If the economy is contracting, is it decreasing at an increasing rate or has the decline begun to slow?

Of course there are also “inflection points” along the way where growth reverses and turns into decline or decline reverses and growth begins. We see this in individual companies, “regions” or groups and the system as a whole. We also see this throughout the various industry spectrums. For example, is oil production growing, slowing, peaking or bottoming with new growth ahead of us? Based on production numbers it looks to me that the world has hit “peak oil” already. Yes we see fracking in many places but this production has proven to be normally short lived and similar to the final “gush” of water when you squeeze a rag in your sink. Does this mean that all of a sudden the “spigot” will be shut off? No, but it does mean that cheap energy is probably behind us.

The topic of “momentum” came to mind after reading a piece by Virtual Capitalist that displayed an info graphic sponsored by Goldcorp. What struck me is that they estimate that there are only 115,000 tons of gold left in the Earth’s crust. This number is in comparison to the estimated 170,000 tons of gold that has already been mined throughout history. (Please do not mail me comments that this 170,000 ton number is wrong because Karen Hudes and others claim an additional 170,000 tons just sitting in Hawaii, it is beyond laughable in my opinion). They also estimate that of these 115,000 tons, only 56,000 tons are actually recoverable.

It is this number of 56,000 tons that got me to thinking. Assuming that it is correct and with the knowledge that the world is currently mining 2,700 tons per year…that leaves a “mining life” of roughly 20 years. Yes of course, the production will slow beforehand and there will be mines still working in 40 or 50 years but look at where we are in the mining cycle. If these numbers are true then we are already 75% of the way through everything that is “recoverable.” Of course, “recoverable” is at current prices and presumably as the supply begins to shrink …the price should rise or at least this is how Mother Nature works…the COMEX somehow seems to work in reverse of this. Higher prices would mean that it will be economically feasible to recover more than this 56,000 ton number.

My point is this, “momentum” in the gold mining industry has been flat at best for 10+ years now and it appears that we have peaked production. The current setback in prices will also further slow future production as some companies have shut down uneconomical mines, other planned mines have been mothballed and exploration budgets have been slashed. Supply will surely slow which illustrates the old saying that the “remedy to low prices is low prices” because when something is too cheap it creates its own new marginal demand at a time that no one wants to or economically cannot create supply. We see this in action today. We have seen China eat up nearly 100% of total global production while the price has dropped. The lower prices mean lower supply. This is a simple 2+2=what question over the long term.

I also thought about “momentum” from the systemic “standard of living” perspective. Where are we now? We know a good part of the world called the emerging markets are seeing growth in their standards of living because they were so low or far behind the developed world in the first place. It is also clear that the overall standard of living in the developed world has already peaked. If we look at this from a U.S. centric standpoint, our standard of living may have peaked in 2007 or even as far back as 2000.

“Momentum” is a very large topic but look at what has happened in the U.S. Our standard of living has already peaked yet the government didn’t want to settle for it (or I should say “allow it to be known”). We have taken on more and more debt in an effort to create more momentum or a higher standard of living, it has clearly not worked. Taking on the huge amounts of debt since 2007 has only stopped the downward momentum financially and economically…and I would add “only temporarily.” We now have more people dependent on social programs for basic survival than ever before (and even on a percentage basis). We also are left with a hamstrung Treasury that has bankrupted itself with no hope of ever paying off the debt incurred.

I wanted to pen this piece to try and help you stand back and look at the big picture from afar. Where will we be in 20 years from now? Will global gold production be half or less than what it is today? Will there be enough to satisfy demand? Or will prices be high enough to ration demand? Will any gold even make it as far as the “street level” for individual purchase? Will our Treasury have the ability to even pay interest only on our debt? What will this mean for the dollar itself? We are either growing or we are not, I believe that we in the “West” are at best only treading water. We have fired almost any and all bullets at this financial monster and 6 years later have nothing to show for it other than debt levels that have nearly doubled. We have also eaten another 6 years into Mother Earth’s nonrenewable commodities… not to mention our seed corn.

Our standard of living will reflect the above realities. While now sitting on top of too much debt, scarce natural resources will need to be “rationed” by higher prices to reduce the demand. Higher interest payments and higher prices will act as a double whammy on our standard of living. The “momentum” has already begun a decline, whether we see an overnight (weekend) “re pricing” or not remains to be seen but the decline itself will accelerate one way or the other. Whether Mother Nature does it or it’s done by “decree” remains to be seen. The inflection points are already behind us, if you can see and understand which direction the overall standard of living is headed then you understand that it is up to you to protect your own. We have lived through an era of “bountiful goods” when in fact our resources are actually limited. It is because of this reality that a “re pricing” looms large and will arrive whether invited or not.

6 Comments

Andrew
on April 7, 2014 at 3:19 pm

I often wonder what part of our national debt will ever be paid? I’m sure some of it will be honored, while most of it will be washed away, either by devaluation of the currency or out and outright default, a sort of sovereign bankruptcy when a country throws up its arms and says “sorry.” At that point, the system either resets and investors give up their claims, or a country like China says give us your assets in exchange for our credit, otherwise we’re going to war on you.

I wonder whether it is more likely we have a big reset whereby investors lose their claims, or whether we have endless legal and military skirmishes for clawing back these pledges?

borders likely close and we go on the defence, That can lead to war, but if everybody

Bill Holter
on April 7, 2014 at 3:29 pm

good question.

Brady
on April 7, 2014 at 8:34 pm

Another great example of why I read your writings!!

Bill Holter
on April 7, 2014 at 9:05 pm

Thanks Brady.

Don Paul
on April 7, 2014 at 9:56 pm

Brady: Isn’t it amazing that a cowboy can be such a sage thinker? Just goes to show you that you don’t get your IQ at an Ivy League School. Intellect is either God given [you’re born with it] or your not, and Bill clearly was [born with it].

Reading his missives has become a daily must for me.

Bill Holter
on April 8, 2014 at 7:38 am

thanks for such kind words Don Paul.

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